Why Microsoft Is a Smarter Investment Than Apple These Days

Apple is just not cheap enough for us to take the risk that its long string of successes will remain unbroken.

Editor's note: Kiplinger.com readers are getting a sneak peek at this column, scheduled to appear in the April 2011 issue of Kiplinger's Personal Finance.

One of the toughest calls we have to make as value investors is how much weight to assign a stock’s price relative to the underlying company’s growth potential. Pay too much, and even stocks of the best companies can turn out to be clunkers. If, say, you had paid $70 for a share of Cisco Systems (symbol CSCO) in mid 2000, you would have lost 70% of your money to date, even though the company’s earnings per share have quadrupled. How is that possible? Simple: In 2000, the stock traded at 194 times the previous 12 months’ earnings. Today, it sells for 16 times trailing earnings. On the other hand, an inferior business selling at a cheap price can be a value trap -- a stock that appears inexpensive year after year but goes nowhere or declines as the business fades (think newspaper publishers and check printers).

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John Heins
Contributing Editor, Kiplinger's Personal Finance